There are two causes for the strong yen. The first is the persistent deflation in the Japanese economy. While British consumer prices rose by roughly 3% and while they rose by 1-2% in the United States and the Euro area, they fell by roughly 1% in Japan.

Deflation first of all causes the relative purchasing power of the yen to gradually rise, and secondly given the fact that most central banks have near zero short term nominal interest rates, real interest rates are in fact higher in Japan than in most other countries.

The second reason is the increased safe haven demand caused by the European debt panic and the slowdown in the U.S. economy.

UPDATE:Tim Duy discusses an interesting aspect of the "safe haven" factor that I mentioned, namely that much of that buying is made by the Chinese central bank. It would be interesting to see to what extent the Swiss franc's appreciation is caused by purchases by China and other governments.

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